The prevailing mood of fashion leaders is one of anxiety and concern. On the one hand, evolving channels, shifting markets, and groundbreaking research offer revenue opportunities and the chance for radical innovation. On the other, global economic growth is slowing and competition is more intense than ever.
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To thrive in this environment, companies must think strategically, sharpen their decision making, and keep their fingers on the pulse of customer demand. They need to get digital right and to address consumers increasingly concerned by the climate-change agenda. At the same time, they must cater to local tastes across multiple markets and cultures. One size will not fit all.
These are some of the findings from our latest report, The State of Fashion 2020, written in partnership with The Business of Fashion (BoF). This fourth in our annual series analyzes major themes around the fashion economy and breaks new ground to explain the dynamics driving the industry. Our survey of 290 global fashion executives and interviews with thought leaders and pioneers have helped us identify ten key themes that will set the agenda in the year ahead. The latest reading of the McKinsey Global Fashion Index (MGFI), meanwhile, reveals new insights into fashion-company performance by category, segment, and region.
A darkening mood
For many in the fashion industry, the glass is half empty. The mood among respondents to our executive survey is sober across geographies and price points, and the pockets of optimism seen last year in North America and the luxury segment have steadily evaporated (Exhibit 1).
Exhibit 1
The MGFI forecasts that growth will slow to 3 to 4 percent in 2020, slightly below the predicted rate for 2019. Strikingly, only 9 percent of respondents think conditions will improve next year, compared with 49 percent who said the same last year.
Exhibit 2
Economic profit grew for the second year running in 2018, following consecutive annual declines from 2012 to 2016 (Exhibit 2). The 16 percent year-on-year rise came largely from improved operating margins driven by cost cutting. The average industry EBITA
margin was 10.8 percent, a tick up on 2017 and the highest since 2014.
One reason that executives are not breaking out the bunting is that the outlook for the global economy is less rosy than it was a year ago. Against this background, fashion-industry fortunes are highly polarized. For an exclusive group of “Super Winners,” the sun is shining (Exhibit 3); by economic profit, these 20 companies added more to the industry bottom line in 2018 than all others combined. The Super Winners include three new entrants—Anta Sports, Heilan Home (HLA Corporation), and Lululemon—reflecting the strength of sportswear and the growing influence of Chinese players. In luxury, Kering made an impressive rise through the ranks, driven by Gucci’s double-digit sales growth and strong performance in Asia–Pacific markets such as Japan. Not only are leading companies highly value-creating, they are also at the cutting edge of innovation. They are also most successful in attracting funding and talent, often leaving the rest to fight over scraps.
Alongside public companies, we also identified a group of “hidden champions.” These privately owned gems often dominate their category areas and generate significant revenues. Some are household names, while others are less visible but still pack a punch. Among the well-known brands, Chanel is a significant player, with revenues of more than $10 billion, while Rolex is one of the few large independent and private luxury watch brands remaining. At the opposite end of the price spectrum is Primark, whose commitment to its core value proposition has made it a formidable competitor. These players show that there is a great deal of industry value outside the spotlight, and the “hidden champions” too have much to offer alongside their listed counterparts.
Exhibit 3
Of course, for every success, there are also relative failures. A growing number of publicly traded and private companies have become “value destroyers.” The midmarket in particular is in the doldrums, generating negative returns for shareholders. For some, the abyss beckons.
Ten themes for 2020
What will define the industry in the coming year? Based on our executive survey, the words on everyone’s lips are sustainability, digitization, and innovation (Exhibit 4).
Exhibit 4
When it comes to sustainability, the industry’s track record remains a source of concern. The textile sector still represents 6 percent of global greenhouse-gas emissions and 10 to 20 percent of pesticide use. Washing, solvents, and dyes used in manufacturing are responsible for one-fifth of industrial water pollution, and fashion accounts for 20 to 35 percent of microplastic flows into the ocean. Consumers are increasingly waking up to this reality and demanding change. In August 2019, Kering CEO François-Henri Pinault spearheaded an industry-wide pact to achieve net-zero emissions by 2050. According to McKinsey’s 2019 Apparel Chief Purchasing Officer Survey, while the absolute number of sustainable fashion products remains low, there has been a fivefold increase over the past two years.
Looking forward, we see more research into sustainable materials and technologies, as well as the circular economy. This should lead to a move beyond 2019’s focus on transparency toward real commitment. That’s great news for consumers and for companies that can make sustainability real. However, given the scale of investment required, it means nervous times for small and midsize players.
Equally, consumers and advocates are calling for the industry to become more inclusive. We see 2020 as being a watershed for “Inclusive Culture,” with diverse races, genders, and sexual orientations increasingly present across organizations and in leadership roles.
Digital disruptors will face more cautious investors in the year ahead. Stock-market valuations of tech players have reached dizzying levels, reminiscent of the dot-com boom of the early 2000s, while a number of private companies have reached unicorn status. The trick in 2020 will be to prove to investors they can turn potential into profit. At the vanguard, we are seeing a new breed of direct-to-customer companies. Asia in particular is emerging as a fertile ground for small and midsize enterprises that leverage e-commerce to reach out from the factory floor.
At the forefront for many is the future role of brick-and-mortar stores. Although they are written off by some as “too 20th century,” we take a more constructive view. We see local stores in particular building a role as partners in the digital revolution, helping customers touch, feel, and experience in convenient locations as they browse online and offline.
The bottom line? The coming year will be tough, as the digital shakeout gathers pace, customers demand more on sustainability, and slower growth puts pressure on margins. However, there will be opportunities. Brands that can align with the dominant trends and continue to innovate are most likely to ride the challenges and emerge ahead of the pack.
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